Mexico, the US, and China – An Unstable Triangle.

Includes an interview with Javier Zarazua of JL Nearshoring about Chinese FDI in Mexico

Mexico continues to attract brands targeting the US market and supply chains.  When US or Europe-based MNCs are the ones setting up operations across the border in Mexico, it’s hailed as a victory for rules-based capitalism.  When the nearshorers are Chinese, however, US policymakers get concerned.  In Globalism2.0, some trade is freer than other trade. 

End of the Story First:  Mexican trade policy will be set by  non-Mexican economic influencers.   Mexico will be the forum where US/Europe and China send their economic gladiators to compete.  Either the US or China will win the future of global trade.  The market ultimately will make their thumbs-up/thumbs-down decision.  Mexico will sell tickets and snacks. 

1H25 will reveal All.  The first few months of 2025 will reveal the direction of Mexico’s trade policy – and I just hope that La Nueva Presidente has time to read about it.   

The tension of the day is whether the US can pressure Mexico to restrict Chinese companies from setting up export bases near the border.  Mexico has raised tariffs on imports from China (and others) and revoked certain tax incentives on new auto factories.  Undeterred, Chinese companies seem to have taken these moves and new threats from Washington as an incentive to ACCELERATE their moves into Mexico.  Nearshoring in Mexico. In Three Years, Chinese Companies Multiply Their Occupancy Five-fold (siila.com)    

By end of 2024, not only will we know who the next leaders of both Mexico and the US will be, but the Biden admin will have made its call on whether or not Chinese-built “connected” autos constitute a national security threat.   In the first few months of 2025 the future of USMCA will be clearer – for good or ill.   

The end of “Peak Nearshore”

We’re witnessing the final flight of “Policy Refugees” who have been driving nearshoring into Mexico to avoid tariffs or onerous compliance rules.  If you’re a brand making cheap in China for the US market and you’ve been on the fence up until now, all of your questions will soon be answered.

“Market Developers” will eventually set the strategy for Mexico – and for the North American trade bloc.  These are the private companies that have the clout or connections to negotiate at parity with Mexican decision-makers at every level.  I’m thinking about when Elon Musk negotiated for Tesla’s gigafactory approval directly with AMLO.  I’m also watching the future of Gang Feng  International – the Mainland company that got nationalized out of its lithium investment in the Sonoran desert.   Mexican trade policy will be the product of high-level private-public deals that, in many cases, run counter to US policy.  The results of these shadowy negotiations will establish the real bones of Mexican trade policy. 

The USMCA self-destruct button:  July 2026

Under the United States-Mexico-Canada Agreement (USMCA) review clause, on July 1, 2026, the U.S., Mexico, and Canada will confirm in writing whether or not to continue the agreement.” USMCA review: Upcoming elections and a path forward | Brookings.  It’s important to remember that the USMCA prohibits Mexico’s participation in China's BRI infrastructure development programs. 

Under normal circumstances, an agreement as profitable to the shareholder class as the USMCA would be fairly bullet-proof.   Both Mexican candidates are pro-USMCA to some degree, but populism/desperation makes the US decision harder to anticipate.  A full-throated endorsement of the USMCA accompanied by guarantees of free-trade and commitment to neighborly relations would go far to dispelling investor doubts about one of the world’s most important trade agreements.  It’s more likely that we’ll hear threats, populist grievances, and irresponsible claims that will undermine faith in the agreement to some degree. 

Without a functioning USMCA,  nearshoring to Mexico becomes 3 – 25% more expensive, depending on a wide range of variables.  If we get to a point where a populist US drops the USMCA, we can expect customs and border procedures to become very unstreamlined very quickly.

The Stakeholders who count:

Mexican Government – The Mexican government sometimes appears to treat FDI and foreign trade as a black box that is working fairly well.  The two main candidates for July’s presidential both favor continuing USMCA.   Mexican trade policy can best be summarized as – “we want to be everyone’s partner, but the US is huge, rich, and potentially unpleasant.”  The AMLO administration isn’t a fan of FDI and prefers to focus on domestic issues.  The new government will probably continue this trend. 

US Government – A second Biden admin will probably remain generally supportive of USMCA without being too public about it.  Look for the status quo to continue – any anti-China actions would be based on national security concerns or the entity list for sanction-breakers.  In a second Trump administration, there will be a lot of anti-Mexican rhetoric and populist promises.  BUT…Texas is by far the biggest beneficiary of the new nearshoring trend, and they have the most to lose if the center of gravity in international trade swings back to California.  Final word – A Trump administration will talk trash about the USMCA but sign on the bottom line in 2026.  This will raise the risk profile of Mexico a bit, but barring geo-political shocks one could expect USMCA to survive the July 2026 review regardless of who is sitting in the White House.

MNCs (Tesla, GM, Nissan) – Conservative force that wields huge power and wants to see the status quo continue.  They would like to see China shut out of the US market but are directly motivated by the interests and decisions of their Boards.  We are making the distinction between Fortune 500 actors and Sovereign Parity actors.  Delphi Technologies is a big company, and they hire lobbyists and consultants to press their positions.  Elon Musk, on the other hand, negotiated directly with AMLO for Tesla’s Mexico plant – and then rejected his site selection plan.

Chinese Privates (BYD, Lingong Group, ShangFeng International) – China can’t figure out if Mexico is the new Africa or the new Germany.  When China Inc goes overseas, it can be aggressive in one of two ways.  In Africa, it negotiated the construction of new rail lines – and then imported its own workers to dig the track bed by hand instead of using local labor.   When negotiating with Germany, China has tended to be more aggressive about market access and technology transfers. 

China prefers high-level, high-value deals negotiated by senior people behind closed doors.  Its priorities are market expansion, disposal of surplus material (steel, consumer goods) and services (labor), and extension of global influence (commercial, political, and military).  Its relationships to private “national” companies that aren’t SOEs are strong and specific.  Major companies like BYD, Hisense, and Lingong aren’t necessarily directly controlled by the government  (“go to Mexico and set up an influential manufacturing operation”), but are rather expected to act as executors of CCP policy (“Chinese cars are high quality and inexpensive – the product of a PRC that cares about the world.”)   In fact, the CCP is at its strongest when commercial actors are unsure of where the boundaries of policy are.  Senior managements are left to guess about what actions will violate an unseen, unknown priority and get them “invited to tea” by a Party department.    

 Interview with Javier Zarazua

To get a better sense of what is currently unfolding on the ground in the Saltillo/Nuevo Leon areas, we spoke with Javier Zarazua of JL Nearshoring  Javier (Mr. Nearshoring®) Zarazua | LinkedIn .  Javier is a nearshoring and sourcing expert who has worked with many Chinese companies in Mexico.

NASP:  What are the big trends in Chinese investment in Mexico?

Javier:  Chinese companies keep coming to Mexico in large quantity from all industries.

NASP: Is the USMCA / T-MEC a big draw for the Chinese?

Javier: They have two big incentives: 1. Their customers are telling them, either you manufacture in Mexico, or you can kiss our contracts goodbye (this is happening a lot, now even louder with the risk of Trump raising tariffs to 60%). 2. They want to get around the US tariffs on China products by manufacturing or at least assembling in Mexico.  

NASP:  Is Hofusan Industrial Park in Nuevo Leon an important center of Chinese manufacturing?

Javier:  Yes, Hofusan was that strategic move that acted as the anchor of the Chinese investment. Just like any other culture, when we go abroad, we cluster together. Hofusan was that small part of China in Mexico, that now has become an obligated stop for all Chinese potential Nearshorers.

NASP:  What industries are the Chinese focusing on?

Javier:  Automotive, EV, heavy trucks, electronics, and furniture are the industries I have seen.

NASP:  What are the Chinese investors getting right?

Javier:  They move really fast, and they are establishing state-of-the-art manufacturing operations. Also, they are learning that once they are here, with their advanced machines, manufacturing know-how, and product knowledge, they can gain more customers than anticipated.

NASP:  What are the Chinese investors getting wrong?

Javier:  They are not adapting very well to the culture. They insist on doing things the way they are done in China. That clashes with the Mexico culture. As a result, they are having a hard time keeping people in their facilities at all levels, from hourly to executives.

NASP:  What advice would you have for Mexican partners and service providers who are approached by a Chinese firm looking to nearshore to Mexico?

Javier:  Be patient, Chinese culture is way more pragmatic and indirect than Mexican culture. In the future, there will be many more Chinese companies and Chinese nationals coming to Mexico, so we have to learn fast how to work together to be successful.

Scenario Analysis

Based on our conversations with Javier and following recent data trends, were able to develop a range of possible and plausible outcomes for Mexican trade policy over the next 5 years. 

Possibilities to come:

1.      Status quo.  More of the same.  Non-sensitive Chinese companies quietly enter the ecosystem.  Chinese corporates come for the tariff relief and stay for the 75% regional content requirements.  Everyone wins with minimal disruptions – so this scenario is unlikely.

2.      Maglevs for everyone!  i Maglevs para todos ! China hits the right balance and becomes integrated into the new North American economy.  US-Mexico trade stumbles when populist politics meets the realities of shipping delays. Mexicans drive better cars than US people do.  Large US/Euro MNCs do fine, but compliance hurdles scare off smaller players.

3.      The North American Alliance replaces USMCA.  A future US admin militarizes the border and links preferential market access to strong action against cartels and illegal immigration.   If you’re not with us you’re against us – but this time WE will decide who’s with us.  Mexico is with us.  YOU’RE WELCOME!!!

4.      The Dead Goose scenario.   Maga patriots and CCP wolf warriors fight out it and everyone loses.  USMCA is abandoned.    Mexico is no longer seen as a viable gateway to the US market.

Final Word:

USMCA makes so much sense and benefits so many people that we tend to assume it’s rock-solid.  In different times, possibly it would be.  China’s expansion and US populism, however, raise the risk profile of the nearshoring economy.  Classic globalism saw business interests take precedence over domestic politics.  Globalism2.0 is taking us back to trade blocs and protectionist policies.